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Making the most of your real estate portfolio

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By John Miologos, AIA, CSI, NCARB, talktous@wdpartners.com

So the era of high-growth is officially over. Every party has to end. Now what? Retailers are turning their attention back to core brands and existing locations. Frank Blake, CEO of The Home Depot, told writers at The Atlanta Journal-Constitution, that the company was mapping its current stores the way it used to map potential sites, identifying underperforming stores for renewed attention, and that that is by far the company’s biggest opportunity.
 
A wise plan for any retailer with a sizable fleet of stores. Without understanding exactly what you have to work with, it’s hard to make smart decisions about how to move forward. For those of you who find yourself in similar circumstances, here’s a roadmap for making sure that you’re getting the most out of the locations you have.
 
Evaluate current locations
An objective assessment of your existing real estate will form the foundation for prioritizing stores that need attention, as well as budgeting how much investment makes sense for each location.

How many years are left on the lease, how much has been invested in the store over the last five years, have you over- or under-invested compared with your other stores, what’s the expected lifecycle of the asset? Even, is the location right based upon your current business drivers? Your objective is to know as much as you can about the market’s potential at that site to prepare a plan of action.

New locations or investment in existing ones?
Once you’ve identified the stores that don’t meet your business’s success criteria, decide if it makes the most sense to cut your losses by closing the underperforming stores, or invest in making them successful.
 
If a new location makes sense, value engineering your prototype is the granddaddy of building efficiency. It’s quite possible to take a great deal of cost out of a building without compromising customer perceptions of the brand. In addition, over the last several years, retailers have been busy shrinking their footprint to reduce real estate and building costs. Meijer, Safeway, Best Buy, and Staples, among others, are experimenting with smaller formats and edited merchandise selections. Retailers not only win by reducing capital expenditures, they are often gaining access to new customers, and pleasing time-constrained customers by offering more targeted store experiences.
 
A new building design may also allow you to use your prototype more strategically. Walmart, like most big-box stores, has been challenged by local jurisdictions and community groups. The retailer developed an exterior architectural strategy (in parallel with its interior strategy, Project Impact) that has been implemented in many communities. This approach has not only greatly improved the retailer’s acceptance rate, but it has also positively affected consumers’ brand perceptions -- even if people simply drive past it.

Takeovers offer good options
With an abundance of empty space, it’s now possible to negotiate great deals. However, takeovers and remodels are definitely getting more complicated from an architecture and engineering perspective.

Going into an existing building has always required more on-site technical expertise than a new ground-up build, but it provides huge savings on infrastructure needs. This can be as much as a 10% savings in lease-hold development costs. In addition, companies are much less cavalier about abandoning the mechanical equipment and electrical systems. The key here is an on-site viability assessment and site investigations conducted by field-savvy architects and engineers. You want to know if you can reconfigure and reuse systems to reduce construction costs.
 
Many retailers are targeting abandoned locations from certain brands that used similar types and sizes of buildings. This strategy allows you to develop streamlined approaches to transitioning from the original brand’s building package to yours. TJX has been evaluating former Circuit City and Linens ‘n Things locations. And it has also been reported that Best Buy, Bed Bath & Beyond, and Kohl’s are looking for takeover opportunities.
 
In fact, takeovers may be your “in” into many areas that previously would have been difficult to work with. Communities may be very receptive to you taking a “dark” location and making it vital again. Of course, you can expect more competition for these sites as time goes on.
 
Cookie cutters are only good for making cookies
Working with a single prototype for all target markets just doesn’t work anymore. Grocery and big box retailers, being the first to feel the constraints of their real estate requirements, are leading the way creating multiple store formats (and brands) that give them more flexibility to reach their customers. While Safeway continues to roll out their highly successful Lifestyle stores, they are also experimenting with a small format concept, The Market by Safeway, aimed at urban customers and fill-in shoppers. Best Buy has been targeting new kinds of customers by developing stores-within-a-store, such as Best Buy Musical Instruments and Club Beats, and even a mall concept, Best Buy Mobile.
 
Armed with the information gathered in your portfolio evaluation, you should have a sense of where there are opportunities exist. Collaborating with the marketing, R&D/innovation groups on new ways to address the location’s demographics, as well as general consumer trends, is a great way to create real innovation.
 
Squeezing every sale possible out of your square footage
What if you can’t affect your location or your footprint, and still want to improve the performance of your real estate? You still have options to boost top and bottom-line sales.
 
Discount, drug, and mass retailers are installing refrigeration and freezer cases to add food items and increase sales per square foot. Grocers and big box retailers are adding foodservice and coffee offers. McDonald’s forecast up to a billion dollars of additional revenue from retrofitting existing real estate with a new combined beverage platform. Now they are in the process of adding fruit smoothies too. Another option is partnering with a compact “drop in” concept, such as Quiznos and Cold Stone Creamery.
 
Summary
Converging development, market, and consumer trends are demanding that retailers adapt store strategies for future growth. Elementary, foundational approaches to improve performance often get overlooked in the rush to action. The key is to assess where you are, what you have to work with, and what your objectives are before you begin to budget and spend.
 
While it’s impossible to overlay a single set of solutions, the approach outlined above will lead to answers that are right for your store portfolio.  Strategic reinvestment in remodeling, takeovers, new concepts, flexible prototypes, as well as new products and services to increase the sales per square foot are all viable options that could help you be prepared to easily address varying site requirements, community standards, and market segments.
 
John Miologos, AIA, CSI, NCARB, is executive VP of architecture and engineering at WD Partners (talktous@wdpartners.com), whose clients include The Home Depot, Walmart, Best Buy, BJ’s Restaurants, Safeway, and Gap Inc. He has 30 years of experience managing the design, development and construction of stores across the globe.

© 2014